Numerex Corporation (NMRX)

Singular Research's Annual "Best of the Uncovereds" Conference Presentation

September 4, 2008 3:30 pm ET

Executives

Joe Lambert – Director of Marketing, Singular Research

Jeremy Hellman – Analyst, Singular Research

Alan Catherall – CFO

Presentation

Joe Lambert

Okay, we would like to welcome you back to our presentation at 3:30 pm. We are on schedule and on time here. The next presentation will be by Numerex Corporation and introducing our speaker will be the Singular analyst, top analyst and CFA Jeremy Hellman.

Jeremy Hellman

Thanks, Joe. We got a little prepared bio into the earnings. I’ll read along the script. We’ve got Alan Catherall, as the CFO of Numerex here. Alan has over 20 years of experience in the telecom industry. Prior to joining Numerex, Alan was CFO of AirGate PCS Inc., which is a publicly traded wireless services company. He has also held executive positions at MCI including serving as the Chief Financial Officer of Syncordia Services that was a joint venture between MCI and British Telecom.

Mr. Catherall also received an MBA from Loyola College in Baltimore and his Bachelor of Science in the University of Wales. He is a CPA and a member of the Institute of Chartered Accountants in England and Wales and I’ll just quite add that we initiated a coverage on Numerex about a week ago or so, it was present on our target and the (inaudible) of stock responded favorably the first day out of the gate, but we think Numerex has a great future ahead of them, ahead of the company and I will turn it over to Alan Catherall.

Alan Catherall

Good afternoon everybody. Thanks for those remarks Jeremy and for everybody’s benefit I just want to mention that I worked for MCI between ’82 and ’96 and I left MCI before the telecom acquisitions and so I don’t know about any of it and IU never met Scott Sullivan; I think that’s an important clarification I need to add. I’ve been with Numerex for about five years and Numerex is a wireless machine-to-machine data services company.

Alright we will skip over to Safe Harbor; we’ll look through a glance. We’ve been a public company for 14 years. Actually what is Numerex to date was reverse merged into a public share back in 1994. We’re an Atlanta-based company, but we have offices in Philadelphia and in also Bozeman, Montana. I’ll explain why during the presentation.

On a 140 employees, I must stratify that unfortunately he could not be here today. This is the last event for us and we’re starting on vacation this week. I’m the company’s Chief Financial Officer and I spend a lot of time with our Chief Operating Officer Mike Marett and I could be with him tomorrow. Louis really has several jobs including Executive Vice President for Corporate Development which used to be bank with Jefferies & Company, so there’s a couple of acquisitions made over the last two years with no bankers involved; Louis did that work himself, so it saved us a good deal of money. Louis also manages a couple of operating units as well.

Finally Mike Lang; Mike Lang is responsible for marketing and also certain sales activities. Part of our mission statement is really to enable our company’s machine-to-machine communications application. We make it simple for the company; we take the work involved of their plate and put it on ours. We have experience and a track record of doing that for our customers.

The attributes of the company; Numerex has advanced (inaudible) if you will. First of all, our position for growth; we’ve grown organically and through acquisition over 20% per year over the past three years and also the market is growing rapidly as well and I will show you some statistics on math.

Secondly, we have ISO/27001 specification; an independent body that certifies the data that we receive pertained and provides our client with secure. We take a lot of stress to make sure that data security is assured if you will and the ISO/27001 certification provides independent reputation of that. Obviously it’s important to many of our customers or with existing customers.

Now if you go to AT&T, one of the wireless services providers, AT&T is going to offer you GSM, that’s been with the platform of them itself. Verizon will concurrently roll off a new CDMA. We can do both and we can do satellite as well, so we offer choice to our customers and our customers wants to choice; also one choice in the trade with modules, the wireless modules that they are using, we provide that to them as well.

Number four and this is probably the most important I think; we maximize M2M. The company comes to us and we help them through the whole deployment process of an M2M application; choice of modules, choice of network, getting their modules certified on some of these network and probably start forward. We do a lot for customers and help them through that significant value-add and a significant differentiator, the rest is the competition.

Finally, proven; we have a number of brand name clients that we provide services too including GE, Black Enterprise, Telcell by the way is the largest selling U.S. carrier in Mexico and (inaudible) obviously in the news in the last couple of days. That’s the key attributes of the company, that’s how we go to market, that’s what we sell our services based upon.

Market opportunity, just one slide on the size of the market. I’m sure everybody talks about the size of the market and the fact that it’s rapidly growing. The new three fold statistics that we can provide to you that indicates the end-to-end market is now growing very robustly. First, slide talks about a 20% annual growth rate, the third one talks about a 40% annual growth rate, I don’t know which one is correct. I do know it’s a rapidly growing industry. I do know that we could bring 30% to 40% over the past several years as we built both organic growth and acquisitions, we intent to take advantage of this growth rate.

Stepping back to moment, if you look at our wireless offerings, really three likes and it’s all aimed, all of our activity really is aimed at the left hand side as you look at the chart here. Numerex Networks, provision of network services. We want to get as many network connections as possible, profitable network connections what we have, as many profitable network connections as possible.

At the end of the last quarter, we had 617,000 connections of the 60% growth rate compared to the same quarter last year. Very important, because we know that network connection provide recovering revenue to us each and every month; it’s also a very high margin revenue as well. The typical network connection has a margin of more than 70%, so very important and we’re going to keep on doing that, you’ll see that this quarter and hopeful you’ll see that in successive quarters as well.

Networks; it's really the provision of the sale of wireless modules. A business that we bought a couple of years ago distributes wireless modules. Why did we buy that business? We wanted to get into the pure wireless module distribution arena. The fact that people are buying wireless modules really is the foot print of selecting a network. It gives a long trend to that activities and finally Flexworx; that’s where we have the intellectual capital of the company if you will. That’s where we help customers through the certification process and that’s why we provide consulting services. That’s really how we differentiate our selves from the competition.

So, a similar chart; the streamlining of complexity. An M2M offering at times very often is a complex go to market strategy on the part of our customers. They want to take the broad marketing themselves and we can help them to do that, we can help enable the M2M application they have in mind. We’re essentially a one stop shop; we can provide the module, we can provide the network and we can provide the consulting services that make that happen. We did that with GE, we do that with a number of customer that we have. So, at the end of the day as we’re heading into slide seven, we streamline the complexity of an M2M offering.

Okay, this is a slide on the network offering as network offerings themselves and at the end of day we offered choice, choice to our customers. Think for example, you go to one of the wireless services carriers such as AT&T; AT&T is going to offer you GSM services. We don’t, only offer GSM, we offer CDMA, we even offer satellite and we offer SMS as well. So, we provide the choice to our customers. The Numerex name has a strong brand name recognition with a proven track record. We’ve been in wireless services for about 7, 8, 9 years.

Coverage; coverage comprises North America basically and North America as you know includes Canada and Mexico and we’re talking to carriers who are wide connected between Europe as well. As you (inaudible) our location in Atlanta you can essentially see our network operations with a bunch of carrier grade assets. For instance we have our own location registrar, our own SMS space, so we file that for latency and come in with many SMS offerings.

We have quadruple redundancy going into a location in Atlanta, so significant, considerable up-time and last but not the least our network operations (inaudible) staff everyday of the year. Network operations as already mentioned we provide the choice to our customers.

Key advantage; key things we’re in business for. The 617,000 network connections at the end of last quarter, we’ll have more at the end of this quarter and more going forward as well. Okay secondly, excellent tech works, especially the distribution of wireless radios. You can see the pictures on the right hand side of the slide; those are wireless radios which these days are no bigger than probably half the size of the business guard and not much thicker as well.

We sold over a million wireless devices in the market over the past couple of years and distributed to our value retailers, contract manufacturers, even end-users such as GE and we are a leading global distributor and has been for three years running. I will say that not only these radios are cash for our network, a considerable percentage of that percentage is growing and we have a lot of focus in making sure that all of the radios are attached to our network. So lots of reasons; one, the total margin improves; secondly, just basic stuff like we used to collect from people, the radio that is connected to our network, have leverage in that situation and provides with provides with markets that is connected as well and you’ll be surprised with the number of customers who contact us, who want both the radio and the network and the network for that radios are right on.

There’s a key differentiator between our ourselves and the competition. We are the only company that provides (inaudible) and our company also provides wireless radios and our company provides network services. I believe, we are the only company that does both and so what you see happening as we bundle our services, we bundle both the radio and the network to put up an attractive proposition for some customers.

Integrated solutions; basically the provision of turn key and customized options; for example, the wireless security option that I’ll talk about shortly, a lot of experience in the teams support integrated solutions and the support is for all aspects of an end-to-end deployment from start to finish and we need customers to benchmark them.

We have two or three divisions, the wireless security division which I’ll talk about, the satellite division, that’s an end-to-end satellite provider. It’s a company that we acquired just over a year ago, actually located in Boston Montana and they provide satellite end-to-end services primarily to the emergency disaster relief market. So for example, our satellite hacking devices are attached to trailers, so as you can image there has been a little bit of traffic over the past several days as a result of hurricanes and maybe additional traffic going forward as well.

So, these are some of the key vertical markets, but if you really think about it we have an horizontal offering, horizontal offering in terms of providing network services, but these are some of those verticals that lean on network services, so as long as we have a radically differentiated offering between real estate services and common security, both uses that for example, both use the same network. So, yes from all verticals our sales people direct to those verticals.

This is essentially a horizontal offering that we go to market with. These are some of the verticals that we are actually going to access; I’ll talk about that shortly. Emergency response I mentioned that with CMR and the satellite tracking unit. Asset tracing not only satellite, but also cellular, I will talk about that; as well as time monitoring, I will talk about that too. Real estate services with GE and I’ll explain that application.

We do have a small bending offering. Actually with certain walkovers in Mexico it’s not a congress offering, not a cashless offering but it does more into the performance of the vending machine. Point of sale, for example we provide network services to GE transportation for monitoring labor process and it’s all very simple, but again all of these vertical markets use the same or similar network offerings.

Okay, first case study where we had a tremendous amount of success, absolutely tremendous amount of success, GE securities. GE I didn’t know that until about 15 months ago, essentially owns the lockbox market in the United States. Many of you have houses for sale at the moment and have a lockboxes on your front door, that’s probably a GE lockbox. I’m one of the unfortunate people that don’t have a house for sale at the moment, but I can tell you it’s a GE lockbox.

The active key device though is the key picture and enables real estate agents to gain authority and allows them to open the lockbox on a wireless basis, essentially at the point the active key device to the lockbox and it opens and dislodges the key. The key advantage, complying with real estate agents in the past is a pre defective device that shows the pass of the PDA. From PDA that required cradling every night to gain that authority and to be recharged and provide that information. Real estate agents didn’t like that and so GE came out with the next generation key device which has a wireless radio embedded in it. It’s a Techworx network and right now there are more than 180,000 access keys at Techworx network.

GE right now is rolling out this service throughout the country and they are doing it on location on a geographic basis. The Atlanta real estate market was launched by GE as they help three weeks ago. I actually went over to the real estate convention just to see what went on an GE had a sort of factory assembly line. One station we extend into old device, the second station where you are given a new active key device, a third station where you activated it on the network and a fourth station where they tested it and made sure your active key device opened the lockbox. It was a simple process, probably didn’t take people very long to go through the process; what did take long was actually getting to the front of the line. There were thousands of real estate agents waiting to turn in their old device.

Somebody from GE total me, there was probably going to be 8,000 to 10,000 active key devices activated that day having the so called market of about 35,000 active key devices activated over about a period of 4 to 5 days. So, as GE rolls out this service throughout the country that’s almost the additional penetration, our potential to achieve over 750,000 active keys and these are devices connected to our network and the benefit, the beauty is monthly recovering revenues and very, very positive margin, as a one key example of using our network.

The next case study in uplink; uplink is the brand name for our wireless security backup unit. Let me explain what I mean by that. A backup unit is one of a safety valve. It will (inaudible) for any reason, the level decides the wire-line connection to your house. If you don’t have a backup unit, you don’t have a security system, that’s obviously a prompt dial-out to the central monitoring station, our device provides that connectivity that will automatically shape in the wire-line connection and establish it if you will. We have about 200,000 subscribers to our networks using this service.

We also get other revenue as well. We actually sell the box and you can see a picture on right hand side into distribution, some have revenue, but the margins are pretty small and then on the hardware, but very strong margins in the recurring service and the recurring service we have at $3 to $6 a month with very attractive margins. In addition, we are rolling out additional product lines to service in the security market and total data unit as well as the units as you will certify and as a result of that we will not only be able to catch up some of our competitions and also meet the product as well.

Okay, just go page 20. Really, again this is a case study of a different application that’s used on network. In this case it’s remote clinical tanks, fuel tanks and loaded tanks monitoring. We’re unable to see this order (inaudible) supplying that, to supply that to divulge a remote strengthening device, but includes a radio which we supply to them that is connected to our network. So, again CMS in this case is about 8000 systems installed with several thousand more connections through supplying that and I must say the Tank-Level Monitoring that we felt were the hardware and network to supplying that.

Pre-acquisition; I believe we’ve been supplying that and since this is a green application, we’ve managed to check the tank levels. There was three existing applications; three things that we do right now, three things that we get revenue from today. Here are a couple of examples of future potential. Those are a automated need agreement. We have a couple of customers with not that many devices right now, but we think there is a huge opportunity here.

Basically, the utility companies and other companies that service the utility industry rely on the paging networks. Right now there is an automotive meter in place and paging network as you know are one way, so the utility companies are a resource that provides services to the utility industry and send a message out that those who deliver that message was actually (inaudible), the benefit of two way communication and we can provide that feedback and wireless line utility companies do not have that information right now.

Secondly, the paging networking are being de-commissioned. I think I we’ll note about 10 or 15 years ago, but really I don’t think I think very few people carry a pager these days. So, there’s been some de-commissioning of the network and yet there are millions of smart meters that need automated management, we can provide that. We’re also sourcing for several utility companies and companies that provide services to the utility industry. It is not a 2008 opportunity, but it is a future opportunity for the company.

Next line is just information on future essential additional security services. Obviously one thing I did mention was we are expanding our part line to include full data, we’re expanding our part line to include underwriter class certification. It is real though that we have the migration going on and has been going on for several years from wire LAN connections to cellular. Our device operates as the primary unit in that situation.

Secondly, cable and IP, I don’t know whether it’s in this area, but I was told about it a year ago, about 18-months before Bell South was acquired by AT&T, Bell South was wearing a bunch of adds that basically said if you can drive your service from Bell South to a cable provider, telecom service you won’t have a security system. That was a statement of the home page ad and certain newspaper headlines for several weeks. That’s not the case with our unit. It acts as a backup, so you do have a security monitoring service, you do have security monitoring.

So, it’s an important distinction to me and we’re all going to be working with the cable companies on that, International expansion as well. The key opportunity for expanding our security services in to Mexico and we have a contract underway with Bell South to do just that. So pretty actual things we’re going, pretty actual case studies, a couple of examples of future potential, a lot of potential was in the company.

On the financial performance, you can see the growth in revenues over the past several years. Remember that the 2007 results for the calendar year was $68 million, the actual numbers for the first six months from a revenue standpoint for 2008 was just north of $37 million. So, you can see in just annualizing that what that comes to, so we’ll see growth again in the top line, the revenue and you’ll see faster growth in services and that’s really an important thing that’s been relative to margins, which typical had been in the teen to low teen hardware service line of about 70%, so a significant advantage for the company.

EBITDA, this has grown from loosing money in 2003 to making money in 2007. 2007 is slightly lower than 2006, because there area a couple of things, only one of which (inaudible) complaint for the first time in 2007 and that cost is pretty close to $1 million over an external cost. So that’s the EBITDA performance of the company.

The balance sheet; the balance sheet as of June 30, compared to the prior quarter end. Just over $6 million in cash, one time to $8.9 million, we did a couple of types about 18 months ago. One was a non-convertible type of $5 million and we’ve got a little bit left on the convertible type before that extinguished and the growth was equity obviously.

Cap structure, about 13.7 million basic shares outstanding. A high percentage of our shares are held by insiders, 5.3 million, that’s 39% of the total share ownership, so a definite strong belief in the company by the directors and senior management. Market cap; you can see that the market cap value is slightly higher.

Key take-aways; okay we are positioned for growth, no doubt about that. We provide security to our customers. We do offer choice and this is a key issue for many of our customers. We maximize the one time offering with proven technology and with that it will be thank you and I’ll answer any questions.

Question-and-Answer Session

Unidentified Participant

(inaudible – microphone inaccessible)

Alan Catherall

The question was we have 617,000 in total. We have about 200,000 wireless security connections, about 180,000 GE active key connections, where does the balance come from. Basically the balance come from primarily but not always customers that have the wireless radio from us and have selected us to be the network provider as well. So that’s a significant number. In addition we provide network services basically to any customer and some of our customers are network customers and use radios provided by other people. Siemens for example, we don’t distribute Siemens radios, but one of our largest network customers, use a Siemens radio, but has network connections along that work, so independent network connections if you will.

Unidentified Participant

(inaudible – microphone inaccessible)

Alan Catherall

Yes, in sense of the monthly bill if you will, I would say that the monthly bill ranges from a low of $2. If it’s exception reporting only; if you want the connection, but you don’t really have any traffic, but you need that connection just in case as opposed to a connection heavily used and has a fair amount of use, that’s a couple of meg possibly and $2 to $10 is the range, but it could average off to $3.50 a month.

Any other questions? No. Thanks everybody.

Joe Lambert

It is now 04:05 pm. Our next presentation with the Banc of Latin America will begin at 04:30 pm. It will be our final presentation and once again I will mention that you won’t want to miss our drawing at the 05:30 pm hour of cocktail for a platinum subscription service with Singular Research for six months. It is valued to $25,000 and our annual subscription on Platinum Service is $50,000 a year, so be sure to stick around for that and we will be back again and start our next presentation promptly at 04:30 pm.

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